The changes in DSP BlackRock equity funds: Should you stay put or exit?

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The Securities and Exchange Board of India had come out with a circular setting up norms for categorising schemes in October 2017. This was done to prevent the duplication of schemes and the use of confusing or potentially misleading names. Mutual Funds were given two months to respond. Following a consultation process, fund houses have now begun modifying schemes to comply with the circular. DSP BlackRock, one of India’s largest fund houses, has announced its changes early this week.

In this article, we cover the changes affecting DSP BlackRock’s Equity Funds. Investors will be given one month starting from February 14th, 2018 to exit the fund without any exit load if they wish to do so. However, an exit will attract short-term capital gains (at 15%) for holding periods less than one year and long-term capital gains tax (at 10%) for longer holding periods. The changes will go into effect starting 16th March 2018.

DSP BlackRock Focus 25 Fund

The DSP BlackRock Focus 25 fund is a Rs 3,000 crore-AUM fund with five-year annualised returns of 15.72% and three-year annualised returns of 9.27%. It has thus turned in a relatively disappointing performance over a three-year basis.

The changes

SEBI’s new classification system allows the fund a maximum of 30 stocks. The fund’s current mandate allows it to hold a maximum of 25 stocks. However, the fund has already moved to a holding of 30 stocks (it is allowed to deviate from the mandate, for up to 30 days).

The implications

The move from a maximum of 25 to 30 stocks is unlikely to dramatically alter returns. It may also bring in some useful diversification.

Should you exit?

No, these changes to the scheme attributes are not substantial enough to warrant an exit.

DSP BlackRock Equity Savings Fund

The DSP BlackRock Equity Savings Fund is a Rs 1,500 crore-AUM fund launched on March 28th, 2016. It has a one-year return of just 9.86%, grossly underperforming its benchmark and category. An equity savings fund invests in equities, debt and derivatives in such a way that it technically maintains a 65% equity allocation (for tax purposes) but effectively has a much lower equity exposure to reduce risk.

The change

The scheme has modified a few technical asset limits. In normal circumstances (where arbitrage opportunities exist), the scheme has hiked the maximum limit for its debt holdings from 25% to 35%. In circumstances where no arbitrage opportunities exist, the scheme has widened its debt allocation band of 35%-50% to 15%-60%. In such circumstances, it has also widened the scope for its net long equity exposure from 20-40% to 20-50%. These changes will give the fund manager more flexibility.

The implications

The changes are relatively minor and technical in nature. The widening of the band for debt allocation will give greater flexibility to the fund manager.

Should you exit?

No, there is little in the changes to warrant an exit.

DSP BlackRock Microcap Fund

This is a roughly Rs 6,500 crore-AUM fund which invests in small-cap companies. It has delivered a whopping 33% annualised over the past five years and 21% over the past three years. The fund managers Kedar Karnik, Mayur Patel and Vikram Chopra have been at the helm since July 2016.

The change

The fund will be renamed as DSP BlackRock Small-cap Fund. It currently invests in companies smaller than the top 300 by market capitalization. This will change to companies smaller than the top 250 by market capitalisation.

The implications

The changes are relatively small. The permission to move up the market cap scale to anything below the top 250 rather than the top 300 can potentially reduce the volatility and increase the liquidity of the fund.

Should you exit?

No. The changes are small in magnitude.

DSP BlackRock India T.I.G.E.R Fund

This is a veteran of the industry, launched as far back as 2004. It is dedicated to infrastructure growth and economic reforms and counts L&T, ICICI Bank and HDFC Bank among its top holdings. The fund has delivered about 18% annualised over the past five years and 13% over the past three. It has been managed by Rohit Singhania since June 2010.

The change

The requirement to invest up to 80% of its corpus in companies benefiting from economic reforms and infrastructure will now be enshrined in its mandate. This formal requirement was previously absent although the fund manager was free to follow it de facto. The balance 20% can be invested in stocks of other companies or in debt.

The implications

The changes are relatively small. The change in the mandate formalizes the fund’s existing theme into a legal requirement.

Should you exit?

No, the changes are relatively small in magnitude and potentially beneficial.

DSP BlackRock Opportunities Fund

This fund is a major outperformer with five-year returns of about 20% and three-year returns of 15%. It has been managed by Rohit Singhania since 2015. Its size is about Rs 4,900 crore.

The change

SEBI has mandated that a fund classed as a ‘large and midcap fund’ should invest a minimum of 35% of its corpus in large caps and 35% in midcaps. Large caps are defined as the top 100 companies in the market by market capitalisation and mid-caps are defined as the companies ranging from the 101st to the 250th by market capitalisation. These requirements have been inserted into the fund’s mandate.

The implications

SEBI’s somewhat rigid definition of what constitutes large and mid-cap companies can take a toll on the fund’s returns going forward.

Should you exit?

No. But keep a tab on returns in the next one to two years.

DSP BlackRock Small and Midcap Fund

This Rs 5400 crore-AUM fund has delivered about 24% annualised returns over the past five years and 16% over the past three years beating its benchmark over both time periods. The fund is managed by well-known fund manager Vinit Sambre since July 2012.

The change

The fund was previously required to invest a minimum of 65% of its corpus in companies below the top 100 in market capitalization. It is now required to invest a minimum of 65% of its corpus in companies ranging from the 101st in terms of market capitalization to the 250th. Other than this, its limit for debt holding has been raised from 10% of the corpus to 35%.

Implications

The strict constraints now in place can affect future returns negatively. Investors should monitor the fund’s performance over the next 1-2 years to gauge the effect of this change. However, the additional debt allocation limit (up from 10% to 35%) will impart stability and liquidity to the fund.

Should you exit?

No, but watch this fund closely over the next 1-2 years.

Common Changes across all the equity funds mentioned above:

The funds can now invest up to 10% of their corpus in units issued by Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InVITs). These are vehicles which invest in real estate and infrastructure assets and earns rental income from them.

They have greater changes to hedge their returns using interest rate futures.